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What Makes It a Nonprofit? Featured

What Makes It a Nonprofit? Cathryn Lavery

When you want to start a business, you will undoubtedly hear terms like “limited liability company,” “nonprofit,” and “not-for-profit,” among others being mentioned. While it can be easy to ignore these terms and what they mean, they are crucial for the future and direction that you take as an organization. Unlike for-profits, nonprofits and not-for-profits have different models, and their taxation, governance and functions are different under the law. Nonprofits and not-for-profits contrast with the for-profits in how they are run and taxed. Here are the things you need to know about for-profits, nonprofits and not-for-profit ventures so that you can find out which one is the right one for you.

Nonprofit organization

Although you might have heard it many times, you might not fully understand what a nonprofit organization is. A nonprofit organization is an organization that offers its services for no profit. They include hospitals, charities, universities and foundations. Nonprofits qualify for tax-exempt status by the IRS because of its mission and purpose, which are social and for public benefit.

For an organization to qualify as a nonprofit, it must serve the good of the public in a certain way. They do not use their profits for anything other than furtherance or advancement of the organization. As a nonprofit, you are required to make your financial and operating information public so that donors can see how their donations are used. If an individual or a business donates to a nonprofit, they are allowed to deduct this donation from their tax return.

A not-for-profit organization

A not-for-profit organization (NFPO) is similar to a nonprofit as it does not earn a profit for owners. The money earned through the business activities pursued by the organization or from donations is pumped back into the running of the organization. However, the difference between NFPO and a nonprofit is that the NFPOs are not required to operate for the public good. They can serve the goals of their members. Some good examples of NFPOs are sports clubs, which exist for the enjoyment of members. They must apply for the tax-exempt status from IRS. The exemptions include sales tax and property taxes. Like the nonprofits, money donated by individuals cannot be deducted from the donor's tax return.

Generally, the key differences between a nonprofit and a not-for-profit include:

  • Nonprofits work explicitly for the benefit of the public, while not-for-profits exist for the benefit of the owners
  • Nonprofits can have a separate legal entity, while not-for-profits cannot
  • Nonprofits operate like a business and try to earn a profit, which is invested back in its operations since no member is required to benefit from it. On the other hand, NFPOs are recreational organizations that do not operate for profit, but profits can benefit the members.

Some organizations start as one entity but can later decide to convert to another. While converting one business to another is possible, it can be a little complicated depending on the entities involved. Although it might not be practical to convert from one entity to another, it is sometimes necessary. Some of the reasons that may force you may include a change in belief. For example, if you believe that you can get better access to loans or other funds by becoming a for-profit, you may consider changing. Another reason is if you want to operate without the regulations that govern nonprofits. This can be one of the reasons to change to a for-profit or not-for-profit. No matter the reason, once you have decided to change from one entity to another, you must notify the relevant authorities, such as the IRS, after consulting the shareholders. Before this, look for professionals to guide you through the process and inform you of the benefits of converting.

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Scott Koegler

Scott Koegler is Executive Editor for PMG360. He is a technology writer and editor with 20+ years experience delivering high value content to readers and publishers. 

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